CARPE DIEM

Professor Mark J. Perry's Blog for Economics and Finance

Sunday, August 31, 2008

How Pervasive is Discrimination in Higher Ed?

Former Harvard President Lawrence Summers on the issue of female under-representation in tenured positions in science and engineering at top universities and research institutions at NBER's Conference on Diversifying the Science and Engineering Workforce in 2005:If it was really the case that everybody was discriminating, there would be very substantial opportunities for a limited number of people who were not prepared to discriminate to assemble remarkable departments of high quality people at relatively limited cost simply by the act of their not discriminating, because of what it would mean for the pool that was available. And there are certainly examples of institutions that have focused on increasing their diversity to their substantial benefit, but if there was really a pervasive pattern of discrimination that was leaving an extraordinary number of high-quality potential candidates behind, one suspects that in the highly competitive academic marketplace, there would be more examples of institutions that succeeded substantially by working to fill the gap. And I think one sees relatively little evidence of that. So my best guess, to provoke you, of what's behind all of this is that the largest phenomenon, by far, is the general clash between people's legitimate family desires and employers' current desire for high power and high intensity, that in the special case of science and engineering, there are issues of intrinsic aptitude, and particularly of the variability of aptitude, and that those considerations are reinforced by what are in fact lesser factors involving socialization and continuing discrimination. I would like nothing better than to be proved wrong, because I would like nothing better than for these problems to be addressable simply by everybody understanding what they are, and working very hard to address them.

Exxon Shareholders Suffer Windfall Loss of -13.7%

Exxon's record profits and its possible "windfall profits" have received a lot of media attention recently - do a Google search for "Exxon's record taxes" or "Exxon's windfall profits" and you'll find several hundred thousand results for either. Do a Google News search for "windfall profits tax Senator Obama" and you'll find hundreds of links to news stories where Senator Obama has proposed taxes on Big Oil's "windfall profits." CEP's Dean Baker explains here what windfall profits are (according to him), and why the government should act to prevent windfall gains. In all of the discussions about Exxon's windfall, record profits, which are owned ultimately by Exxon's shareholders, nobody ever discusses how Exxon shareholds have been doing lately. So let's ask the question: With oil and gas prices at record recent highs (rising 50% this year), with Exxon profits at record highs, how is the average Exxon shareholder faring? Well, not too well really. If you had bought one share of Exxon at the begining of the year, you would have paid $94, and you would have received a $0.35 dividend in Febuary, and $0.40 dividends in May and August, for a total of $1.15 in dividends this year. Exxon is now selling for $80 (see chart above), so your annual return this year from holding Exxon stock would be -13.7%, and a $1,000 investment in Exxon on January 1 would now be worth only $863. Seems like more of a windfall loss than a windfall gain for Exxon shareholders.

Ben Stein Asks Some Good Questions

I would argue that over the long term, oil companies’ profits relative to sales are not above average for industrial or financial companies. But even if they were, why punish the owners of the oil companies, who are largely pension plans, group or individual, and individual investors (see chart above)? Why should we punish some American firefighters who own oil company stocks more than American firefighters who own drug company stocks or tobacco stocks? Why tax away the savings of some Americans because they happen to own a share in a company that supplies a totally legal, absolutely indispensable product like oil? I don’t get that at all.~Ben Stein in the NY Times

Change We Dare Not Believe In: Audacity of Hype

Saturday, August 30, 2008

Starbucks vs. The Little Guy

As anti-corporate crusaders are now discovering, instead of advocating for legal prohibitions on chain stores or attempting to zone the offending businesses off of Main Street USA, mom-and-pop shops can successfully combat the coffee behemoth by using old-fashioned market competition.

ReasonTV: Stop Outsourcing Roles in Pro-Obama Videos to Foreigners

Electoral Map Based on Home Prices?

On this recent CD post, I featured the top map above (click to enlarge) showing annual home prices changes from OFHEO. In the light blue states, home prices have increased over the last year year (2007:Q2 to 2008:Q2), and in the yellow and red states home prices have declined, with the largest percentage price declines (double-digit) in the red states (CA, FL and NV). Is it possible that the pattern of home prices increases/decreases will translate into a comparable voting pattern in the presidential election? Real Clear Politics allows you to create your own electoral map, and the bottom map above (click to enlarge) shows the results of an analysis done at Right Thinking blog, which reports: Conventional wisdom, and the current strategy of the Democrats, would be to use the anger and suffering of those under economic hardship to vote against the incumbent party. According to this thinking, Republicans would suffer in those states. I got to wondering that if this theory were true, how would the election turn out?

As the bottom map shows, McCain would win with 275 electoral votes to Obama's 263. As Right Thinking points out, it won't actually end up that way, but it's an interesting analysis. And using the Real Clear Politics website, you can create alternative electoral maps based on various assumptions.

Economy of Words

Some 94% of Americans polled by Harris Interactive this month said they were satisfied with the lives they lead. According to Gallup, only 9% of Americans are dissatisfied with their jobs and only 13% are dissatisfied with their job security. The unemployment rate is at a five-year high of 5.7%, but it wasn't long ago when that was considered close to full employment (see chart above, average unemployment since 1970 is 6.11%).

To hear the Democrats at their convention this week, you'd think Americans were listening to the Democratic speeches as they huddled around their kitchen tables - if they hadn't already been used for firewood - deciding which of their children to pack off to the orphanage and how much tree bark they can afford to eat next week.

Thursday night, Barack Obama proclaimed: "Our economy is in turmoil, and the American promise has been threatened once more." He went on to describe an America reminiscent of "The Grapes of Wrath."

Friday, August 29, 2008

Intrade 2008 Recession Odds At All-Time Low: 17%

Real Disposable Income Up By 11.4% in QII

According to today's BEA report (Table 10), real disposable personal income increased in July by 1.2% compared to July last year, following a 3.4% annual increase in June and 6.3% increase in May (see chart above). Both growth rates (May and June) were above the 2.6% average growth in real disposable income since 2001, following 7 months (October 2007 to April 2008) of below-average growth (see chart above). On a monthly basis, the July growth in real personal disposable income was negative at -1.7% (from June).

Although real disposable income growth showed weakness in the last quarter of 2007 (0.6%) and the first quarter of 2008 (-0.7%), the above-average, year-to-year growth rates of 6.3% (May) and 3.4% (June) contributed to an 11.4% increase in real disposable income during the second quarter 2008 (see Table 6), one of the biggest quarterly increases in history, largely due to the the Economic Stimulus Act of 2008. According to the Joint Committee on Taxation and the Congressional Budget Office, "rebates to individuals are expected to total $106.7 billion for 2008. The majority of rebates were sent during the initial round of payments, which began April 28, 2008, and will continue on a weekly basis through mid-July 2008."

Fat Cat Oil Shareholders? No, "Broadly Middle-Class"

The data suggest that ownership of oil and natural gas company shares is broadly middle-class.

1. 42.7% are owned or held by mutual funds and other asset management companies that have mutual funds. Mutual funds manage accounts for 55 million U.S. households with a median income of $68,7006, and the owners of mutual funds include 16% of households with incomes of $25,000 or less. 2. 27% of oil and natural gas company shares are held in private and public pension funds, and these funds manage assets, directly or indirectly, on behalf of 129 million pension-fund participants whose accounts have an average value of $62,280. 3. 14% of oil and natural gas company shares are held in IRA-type retirement accounts with an average value of $22,465, owned by 45 million Americans.

Recession Spoiler: Real GDP Grew At 3.3% in Q2

Real GDP exceed consensus expectations and grew at an annual rate of 3.3% in the second quarter 2008 (see chart above), a significant upward revision from the 1.9% advance estimate one month ago. According to First Trust Advisors, "The largest drag on real GDP continues to be home building, which subtracted 0.6 points from the growth rate. Excluding housing, real GDP grew at a 4.0% rate in Q2." The 3.3% growth in real, second-quarter GDP was also above the 2.72% average since 1998 (see chart above).

Exxon Mobil Per Second: $1,400 in Profits, But It Pays $4,000 in Taxes, $15,000 in Operating Costs

Obama thinks government is not getting a "reasonable share" of oil companies' profits, which in 2007 were, as a percentage of revenue (8.3%), below those of U.S. manufacturing generally (8.9 %). Exxon Mobil pays almost as much in corporate taxes to various governments as the bottom 50% of American earners pay in income taxes. Exxon Mobil does make $1,400 a second in profits -- hear the sharp intakes of breath from liberals with pursed lips -- but pays $4,000 a second in taxes and $15,000 a second in operating costs.

Wednesday, August 27, 2008

GOP VP Odds on Intrade.com

President John F. Kennedy, Early Supply Sider

BarackObama, listen up!

In this video from August 13, 1962, when the highest marginal individual income tax rate was 91% and the highest marginal corporate tax was 52%, President John F. Kennedy announced his plan to introduce permanent, across-the-board tax cuts for both individuals and corporations. Kennedy argued that both "logic and equity" demanded tax relief for Americans, and that the dollars released from taxation would create new jobs, new salaries, and spur economic growth and an expanding American economy, thereby creating more tax revenues.

Kennedy's supply-side tax cuts were passed, and by 1964 the top personal tax rate was 77%, dropping to 70% in 1965. In 1965, the corporate tax rates were reduced to 22% and 48%, from previous rates of 30% and 52%. The Kennedy tax cuts did help expand the economy, resulting in a 106-month economic expansion during the 1960s, the longest expansion in U.S. history until the 120-month expansion from 1991-2001. Tax revenues grew by 65% from 1965 to 1970.

Adjusted for Household Size, Real Income Reached An All-Time High in 2007, +66% Higher Than 1967

The Census Bureau just released its annual report that includes real, median household income for 2007 ($50,233). From the report:

Between 2006 and 2007, real median household income rose 1.3%, from $49,568 to $50,233 (see top chart above)—a level not statistically different from the 1999 prerecession income peak ($50,641 in 1999 and $50,557 in 2000). This was the third annual increase in real median household income. Compared with 1967, the first year for which household income statistics are available, real median household income has increased 29.6%.

Comments: A comparison of real median income in 1967 of $38,771 per household to income of $50,233 per household in 2007 (29.6% higher) doesn't take into account the significant 22% decline in average household size over this period, from 3.28 persons per household in 1967 to an all-time low of 2.56 persons per household in 2007 (Census data here for income, here for average household size), see top chart above.

When adjusted for household size, real median income per household member reached an all-time high of $19,546 in 2007 (see bottom chart above), 65.6% higher than the $11,820 income per household member in 1967, and more than 2 times the unadjusted increase per household of 29.6% reported above.

Lost in all of the discussions and media reports about stagnating wages, income inequality, and the decline of the middle-class, we have this amazing statistical reality: In just a little more than one generation, real median income per household member has increased by a factor of almost 2/3!

It's been said that "the media constantly dwell on minor problems without celebrating the broader, more upbeat context in which they exist." A 2/3 increase in real income per person in just 40 years is definitely part of the broader, more upbeat context.

Movin' Up and Down The Income Quintiles in 2 Yrs.

From the Census Bureau: Of households in the lowest income quintile in 2001, 28.6% were in a higher quintile in 2003; of those originally in the highest income quintile, 32.1% were in a lower quintile 2 years later.In other words, in just a two-year period, 2 out of every 7 households in the lowest income quintile (bottom 20%) in 2001 moved up to a higher income group by 2003, and almost 1 out of every 3 households in the top income quintile in 2001 moved to a lower income group by 2003, suggesting significant income mobility over even very short periods of time.

Tuesday, August 26, 2008

UM Predicts Job Boom: 3.5m New Jobs in 2009-10

In their annual summer forecast of the U.S. economy, University of Michigan economists say that three factors have helped our economy stave off a full-blown recession: 1) strong and timely action by the Federal Reserve to prevent financial collapse, 2) temporary tax breaks for households and businesses, and 3) strong demand for our products abroad.

The U-M economists predict annualized increases in real GDP growth of 2.6% in the first half of 2009, 3.3% in the second half and 3.6% during 2010. This translates into an increase of 900,000 payroll jobs during 2009 and 2.6 million jobs during 2010, after a loss of 700,000 jobs this year. Even so, the unemployment rate will increase next year to an average of 6.3%, but will fall to 5.6% by the end of 2010.

Along with the creation of 3.5 million jobs, rising GDP and slowing consumer price inflation over the next two years, the U.S. economy will show some signs of improvement in the housing market, oil prices and vehicle sales.

OFHEO: Home Prices Increased in 30 Out of 50 States Over Last Year, From 2007:Q2 to 2008:Q2

The map above (click to enlarge) is from the latest housing report from the Office of Federal Housing Enterprise Oversight (OFHEO), showing the "Four-Quarter Price Change by State" from 2007:Q2 to 2008:Q2 in the OFEHO House Price Index, which averaged -1.7% for the country. However, notice that the biggest price decreases over the last year in the OFHEO House Price Index (HPI) have taken place in 4 states: CA (-15.8%), NV (-14.1%), FL (-12.4%) and AZ (-9.2%), see previous CD post (data through 2008:Q1 for that post). After those four states, the next closest price decline was the -4.85% decline in Rhode Island, after AZ (-9.2%). If you take out those four states (CA, NV, FL, AZ) the overall price decline over the last year was only -.75%. That is, the huge price decreases in the four states contributed about -1% to the overall national decline of -1.7% (without weighting for the size of each state).

Further, house prices have increased over the last year in 30 states, ranging from +0.56% for WA to +4.93% in OK, including increases of more than 4% for two states (OK and WY), and increases at or above 3% for 12 states (OK, WY, TX, OK, SD, ND, MS, AL, NC, SC, KY, WV). Finally, more than half of the states (27) have experienced home price increases of 1% or greater.

Comment: The way it gets reported in the media, you would think the entire national real estate is crashing, with home prices everywhere in "free fall," when the reality is slightly different: Over the last year, there have been significant home price corrections in only 4 states of between -9 and -16%, moderate price declines of between -2 to -5% in 9 states, and price increases in 30 states of between +0.56% and +4.93%.

Mr. Mayor: How Do You Define "American-Made"?

My decision to strongly urge all Warren mayoral appointees to buy American-made vehicles was based on what I call "economic patriotism."~Mayor Jim Fouts of Warren, MI, in today's Detroit Free PressDear Mr. Mayor:What about these American-made vehicles produced by UAW workers in American factories for foreign car companies, do they count as "American-made" or not? American-made UAW vehicles:Mazda 6Mitsubishi EclipseMitsubishi GalantToyota CorollaIsuzu i-Series TruckMazda B-series TruckMitsubishi Raider TruckToyota Tacoma TruckWhat about these Canadian-made vehicles, produced by UAW brothers and sisters at factories in Canada, do they qualify as "American-Made"? Isn't Canada a foreign country?:Canadian-made UAW vehicles:Buick LacrosseChevrolet ImpalaChrysler 300Dodge ChallengerDodge ChargerFord Crown VictoriaLincoln Town CarMercury Grand MarquisPontiac Grand Prix

Update: What about the Chevy Aveo, which is built by Korean automaker Daewoo?Update: What about the 2008 Honda Pilot and Honda Civics, built in the U.S. with higher domestic content (70%) than the 2008 Dodge Ram (68%)?

Economic Patriotism = Economic Racism/Bigotry

I am going to insist that all of the mayoral appointees buy American-made vehicles when they purchase new vehicles.~Jim Fouts, Mayor of Warren, Michigan, in today's Detroit Free PressBoth major political parties are infested with protectionists who would discriminate on the basis of national origin no less virulently than David Duke or any other racist would discriminate on the basis of skin color.~Economist Steven LandsburgGiving preference to American-made products over German or Japanese products is the same injustice as giving preference to products made by whites over those made by blacks. Economic nationalism, like racism, means judging men and their products by the group from which they come, not by merit.~Ayn Rand Institute

Quotes of the Day II

1. The reason so many people misunderstand so many issues is not that these issues are so complex, but that people do not want a factual or analytical explanation that leaves them emotionally unsatisfied. They want villains to hate and heroes to cheer-- and they don't want explanations that do not give them that.2. There are countries in Europe that would love to have their unemployment rate fall to the 5.7% unemployment rate to which ours has risen. Yet those who seem to want us to imitate European economic and social policies never seem to want to consider the actual consequences of those policies.~Thomas Sowell

Quote of the Day:Well-Earned, Richly Deserved Tax

"Windfall," of course, is just another word for "undeserved," which is why windfall profits are defined as the profits earned by someone other than you. If we were honest with the people having their profits yanked away, we'd call it the "well-earned and richly deserved profits tax."~Jonah Goldberg

Over 100 Years, Food Prices Have FALLEN By 82%

Do a Google search for "rising food prices" and you'll get 391,000 results, while a search for "falling real food prices" gets about 144 results, a ratio of 2,700:1. Maybe we get so focused on the most recent year or two of rising prices for products like eggs that we lose sight of the longer term, historical trends. The chart above shows the real, inflation-adjusted prices of eggs (in 2008 dollars), annually back to 1890. The price we're paying today for eggs (in real dollars) is about 1/7 of the price 100 years ago, a decline of 85% compared to the price our grandparents, great-grandparents or great-great grandparents paid in the early 1900s.

And it's not just egg prices that have fallen over the last 100 years. Grocery prices in general fell in real price by 82% between 1919 and 2007, measured in the number of hours worked (9.5 to 1.7 hours, another way to adjust for inflation) to purchase a 12-item basket of groceries, according to the Dallas Fed (see graph below).

Monday, August 25, 2008

Gas Falls Below $3 Per Gallon in Mississippi!!

NY TIMES -- American natural gas production is rising at a clip not seen in half a century, pushing down prices of the fuel and reversing conventional wisdom that domestic gas fields were in irreversible decline.The new drilling boom uses advanced technology to release gas trapped in huge shale beds found throughout North America — gas long believed to be out of reach. Natural gas is the cleanest fossil fuel, releasing less of the emissions that cause global warming than coal or oil.

Rising production of natural gas has significant long-range implications for American consumers and businesses. A sustained increase in gas supplies over the next decade could slow the rise of utility bills, obviate the need to import gas and make energy-intensive industries more competitive.

“It’s almost divine intervention,” said Aubrey K. McClendon, chairman and chief executive of the Chesapeake Energy Corporation, one of the nation’s largest natural gas producers. “Right at the time oil prices are skyrocketing, we’re struggling with the economy, we’re concerned about global warming, and national security threats remain intense, we wake up and we’ve got this abundance of natural gas around us.”Domestic natural gas prices have already plunged 42% since early July, an even faster drop in price than oil or most other commodities, in part because the rapid supply growth has begun to influence the market (see chart above, prices have fallen to the lowest levels since early January 2008).MP: One more reason that inflation's not a problem: energy prices are plummeting. Natural gas has fallen by more than 42% in two months, and gasoline was spotted for $2.99 per gallon this morning in Mississippi.

Reality Check: Dude, Where's My 2008 Recession?

Monthly US data on payroll employment, civilian employment, industrial production and the unemployment rate are used to define a recession-dating algorithm that nearly perfectly reproduces the NBER official peak and trough dates. The only substantial point of disagreement is with respect to the NBER November 1973 peak. The algorithm prefers September 1974. In addition, this algorithm indicates that the data through June 2008 do not yet exceed the recession threshold, and will do so only if things get much worse. Abstract from "What's a Recession, Anyway?" by UCLA Professor Edward E. Leamer, NBER Working Paper, August 2008

Gas at $3.15

Markets in Everything: Mobile Human Phone Booths

One of the most interesting service you find on the street in Peru is the “llamadas”. It’s generally women or teenagers with a bundle of mobile phones and a stop-watch who act as human pay phones. They wear colorful clothes with mobile carriers brands (see photo above) and the “llamadas” logo (that they also shout when you pass by).HT: Ben Cunningham

Former USSR Would Have Dominated the Olypmics

If the former Soviet Union had not broken up, it would have dominated the medal count in the 2008 Beijing Olympics. If the USSR did not shatter into 15 different countries in the early 1990s, their medal count in Beijing would be staggering. As you can see in the chart below, the countries that made up the former Soviet Union won an amazing 171 medals. They did not win more gold medals than China, but their total medal haul was nearly 50% more than the next-place finisher — the United States!

Sunday, August 24, 2008

Gallup vs. Intrade: Pretty Big Difference

Voter Turnout By Age

Interesting graphic above showing voter turnout by age (click to enlarge), from Political Arithmetik. Note that voter turnout for the 60-70 year old group (about 70%) is about twice the 35-40% turnout for the 25-30 year old group. The reason that might be important? The most recent Gallup weekly estimate shows Obama leading 60%-33% among 18-29 year olds (very low voter turnout), while McCain leads 46%-38% among those 65 and older (very high voter turnout).

Swimmers and Sprinters Keep on Getting Faster

Wage-Price Spiral? Not Even Close.

Brian Wesbury in the WSJ last week: "The most painful and frustrating economic policy blunder of the past 50 years was the Great Inflation of the 1970s. Painful, because it was the catalyst for three damaging recessions (1973-75, 1980, 1981-82, see shaded areas above), all the while eroding living standards and seriously undermining confidence in America. Today, the U.S. (and through it the world) faces its greatest threat from inflation in 30 years. And as in the past, this threat is being met with denial and political expediency."I have argued against the "inflation threat" in posts here, here, here, here and here, some of which have made the case that for inflation to be a real threat, we would have to see both measures of inflation rising simultaneously: headline and core, which hasn't yet happened. Another variation of this argument is that for inflation to be a threat, we could have to see simultaneous increases in: a) headline inflation, b) core inflation and c) wage inflation, which certainly did happen in the 1970s, but is not happening now. The chart above shows the year-to-year percentage increases in the monthly wage series "Average Hourly Earnings: Total Private Industries" (BLS data here). A wage is simply a price, the price of labor, and significant inflationary pressure would affect wages just like it would affect the price of oil, food and core prices. Notice in the chart above that wage increases in the inflationary 1970s were between 6 and 9 percent annually for a full decade (the "wage-price spiral"), and far in excess of the 2-4% range during the last two decades. Further, wages increases have been declining in both 2007 and 2008, and are currently at the lowest level (3.4%) since late 2005. Where's the wage inflation? By definition, inflation is a general increase in the price level, when all goods and services are rising simultaneously, in general and on average. Therefore, for inflation to be a serious threat we would have to see all prices rising, including: a) core inflation (without food and energy) and b) wages, neither of which has been increasing at a rate suggesting that inflation is a clear and present danger.

Bottom Line: Unless, and until, we see core inflation and wage inflation rising, inflation can't be a serious threat to the economy. A wage-price spiral? Not even close.

Quote of the Day

Obama has also promised that "we will get 1 million 150-mile-per-gallon plug-in hybrids on our roads within six years." What a tranquilizing verb "get" is. This senator, who has never run so much as a Dairy Queen, is going to get a huge, complex industry to produce, and is going to get a million consumers to buy, these cars. How? Almost certainly by federal financial incentives for both -- billions of dollars of tax subsidies for automakers, and billions more to bribe customers to buy these cars they otherwise would spurn.~George Will

US Medals: Olympics =108, Education Olympics =1

Over the last few decades, the United States has trailed other developed (and some developing) nations on international measures that assess student performance in reading, mathematics, and science. The purpose of the Education Olympics is to contrast America’s tepid academic performance with its athletic dominance. While America’s athletes bring home a trove of medals from Beijing, its student competitors are expected to be relatively barren of jewelry (see chart above). We want to ask: What will the United States do to turn around this critical situation?

The data on which the events in the Education Olympics are based come from four main international measures, the Trends in International Mathematics and Science Study (TIMSS), the Progress in International Reading Literacy Study (PIRLS), the Programme for International Student Assessment (PISA), and the Civic Education Study (CIVED). There are 58 events, each based on test scores from a section of one of the above exams, except for a handful of events that reflect measures of educational attainment.

MP: The U.S. has won 101 medals this year at the 2008 Summer Olympics, but only a single medal in the 2008 Education Olympics, according to the Thomas Fordham Institute. The U.S. had the highest 9th grade scores on the CivEdsubtest—civic skills. Unfortunately, in the 24 different science and math categories, the U.S. ranked in the top ten only three times, and never ranked higher than 7th place.

It's the Lake Wobegon Effect: Almost All Public School Teachers Are Way Above Average

David Whitman, in his book "Sweating the Small Stuff: Inner-City Schools and the New Paternalism," reports that in Chicago, from 2003 through 2006, just three of every 1,000 teachers received an "unsatisfactory" rating in annual evaluations; in 87 "failing schools" -- with below average and declining test scores -- 69 had no teachers rated unsatisfactory; in all of Chicago, just nine teachers received more than one unsatisfactory rating and none of them was dismissed.From George Will's column in today's Washington Post

Saturday, August 23, 2008

Real Estate Bubble? Only 4 States: CA, FL, NV, AZ

A bursting real estate bubble set off the Japanese recession of the 1990s, which deepened as ailing banks languished. It took Japan’s economy more than a decade to resume steady, noticeable growth.

Will this happen to the United States? Probably not, but we may face a protracted process of recovery, stretching longer than the two or so years usually required to climb out of recession.

Behind every financial crisis there is usually a crisis in the real economy, based in some underlying structural deficiency. Even if the financial crisis is bottoming out, sooner or later the real crisis must be faced.

The fundamental problem in the American economy is that, for years, people treated rising asset prices as a substitute for personal savings. The thinking went something like this: As long as your home’s value rose every year, you didn’t have to set aside so much from your paycheck.

Of course, asset prices haven’t been rising much lately, so many people will need more savings for their retirement or for possible emergencies.

MP: I'm not disagreeing with Tyler, but his comments made me think about the possibility of a U.S. real estate bubble, and the possibility that even without a real estate bubble/crash, we could experience sustained falling home prices nationally. But there really is no "national real estate market," since all real estate is local (and even varies within an individual zip code), and what is happening in Florida or Nevada could be much different than what is happening in Texas and Michigan.

Using the Office of Federal Housing Enterprise Oversight (OFHEO) quarterly real estate price indexes for U.S. states through the first quarter of 2008 (data available at the St. Louis Fed), I inspected the graphs for the housing price index in each of the 50 states, and found the following:

For four states (Arizona, California, Florida and Nevada) there has definitely been a real estate bubble with a definite crash in prices in in recent quarters (see top chart above of Nevada). For six other states (Hawaii, Maryland, Massachusetts, Michigan, Rhode Island and Virginia), there's some correction in prices going on, but not enough of a price drop to make it a crash (subjective opinion, see middle chart above). For the other forty states, it seems clear that there hasn't been a crash at all, and real estate prices have continued to increase in most of those forty states (see bottom chart above), or have leveled out.

Bottom Line: To the extent that there has been a real estate bubble in the U.S., and a subsequent crash in home prices, it's been pretty isolated to a small group of states like CA, FL, NV and AZ, and most of the country has seen home prices continue to rise, or flatten out. See graphs of each state below:

Famous Olympic Champion vs. Notorious Food Cop

Consider Michael Phelps. Eating a diet loaded with so-called “junk” foods (white bread, fried eggs, and pasta by the pound), the famous Olympic champion downs an astonishing 12,000 calories each day. However, at 6’4” and 195 lbs, Phelps is far from obese or unhealthy. The swimmer’s big appetite and lean physique seems to contradict the dietary rules eschewed in obesity policies. The explanation is balance. Phelps offsets the energy he eats with the energy he burns.

Food cops, like Michael Jacobson from the Center for Science in the Public Interest, and other “obesity” experts single out “junk food” as the culprit behind our burgeoning behinds. Pushing a food-only approach, these sticklers lobby for highly restrictive public health policies that leave no room for common sense (and diets that leave no room for dessert). But the nutritionally risqué diets of Phelps and other top-performing athletes show that any food can be part of an active lifestyle.

Free Market, Though Imperfect, Is Self-Correcting

The superiority of free markets to government regulation is not based upon a magical ability of businesses or even markets to operate flawlessly or at optimal efficiency at all times. Businesses often make huge mistakes, and we have known for centuries that markets are constantly fluctuating, even wildly. Recently the tech bubble and now the housing bubble show that even entire segments of the market get so out of whack that we all wind up suffering painful corrections.

Markets, though, correct. Because they are ultimately tied to basic forces such as supply and demand, customer desires, and of course competition, they are anchored to real forces within the economy as a whole. No matter how out of whack they get, the long-term trend is always going to be in the right direction. More economic growth, satisfying customer demands, better quality at lower prices, and increased productivity and efficiency. Markets work well—not perfectly, but well—because they are not engineered from the top-down. They are chaotic. They encourage experimentation. They allow mistakes. In markets, even the mighty can fall.~David Strom "Is the Free Market Perfect?"

More On Medal Inequality at the 2008 Olympics

The chart above shows income shares from 2006 IRS data (most recent data available), and the most recent medal shares from the 2008 Olympics (as of 9 a.m. today). Notice the amazingly similar outcome between shares of adjusted gross income earned by the top 5, 10 and 25% of Americans, and the shares of the 906 Olympic medals in 2008 earned by the top 5, 10 and 15% of medal-earning countries.

The "income inequality" that seems to disturb so many people is almost exactly replicated in "Olympic medal inequality," and yet seems to cause no objections or concerns about inequality, and generates no calls for "medal taxes" or "medal redistribution," etc.

The diagram below shows that the distribution of 2008 Olympic medals, like the distribution of income, clearly follows a standard Pareto distribution, and not a normal distribution.

In a Pareto distribution, there is an "emphasis on the extreme," in contrast to an "emphasis on the average," in a normal distribution (see chart above).

Is it possible that underlying the widespread objections to income inequality is the assumption that income should be distributed normally, and not according to a Pareto distribution? After all, an income distribution with an "emphasis on the average" sounds a lot better (at least to many leftists and redistributionists) than a distribution with an "emphasis on the extreme." Perhaps if more people could understand that Pareto-distributed outcomes are often the norm in both nature (see examples here like sizes of sand particle, and sizes of meteorites) and in competitive sports like the Olympics (and see NBA example here), we would have a better understanding that it is natural that income will always be Pareto-distributed. Let's just accept it, and not spend time worrying about income inequality, just like we accept Olympic medal inequality.

And perhaps all of the redistributionist tax policies and progressive income tax schedules are really an attempt to take a naturally occurring Pareto-distributed outcome for income, and artificially impose a normal distribution.

Imagine for a moment how "Olympic medal taxes," and especially a "progressive Olympic medal tax," with subsequent "medal redistribution" at the Final Ceremony to achieve a more "normal distribution of medals" would quickly destroy the competitive spirit of the Olympics and reduce the overall level of athletic performance, especially on the "extreme," world-class athletes at the top like Michael Phelps. If the final ceremony at the Olympics included imposing a medal tax on an "extreme athlete" like Michael Phelps, and redistributing some of his gold medals to countries that earned "too few" medals by some consensus, you can imagine what might happen - he might not show up at the next Olympics, or certainly wouldn't have the same incentive to train as hard.

We might get the same outcome when we attempt to tax the top, or "extreme income earners" - they'll stop working or won't have the same incentive to work as hard.

Bottom Line: The Olympic medal winners are respected and admired, despite the inequality of the Pareto-distributed outcome in those competitions, with an "emphasis on the extreme" athlete. Instead of always vilifying them, perhaps we should pay the same respect to the Pareto-distributed winners of our free enterprise system - the successful, world-class, "extreme" workers at the top of our economic ladder.

Friday, August 22, 2008

Intrade Predicts Biden As VP

Annual M2 Growth: It's Nothing Like the 1970s

The chart above shows annual M2 growth rates (monthly data here) based on the average M2 level in each year, except for 2008, which shows the growth rate of M2 from July 2007 to July 2008.

Notice that in the inflationary 1970s period, there were 5 years of M2 growth above 12% (1971, 1972, 1976, 1977 and 1983), 12 consecutive years of above average M2 growth between 1975 and 1986, above average growth in 15 out of 16 years between 1971 and 1986. More recently, we've had five years of slightly above-average M2 growth between 1998 and 2003, and below average M2 growth for the last 5 years.

Bottom Line: Today's inflationary environment is nothing like the 1970s.

The Flower Cartel in Louisiana, Vet Cartel in MD

1. In Louisiana it is illegal to sell and arrange flowers without permission from the government. Aspiring florists must pass a subjective licensing exam that is graded by existing florists, who have a direct incentive to keep new competitors from entering the market. Thus the failure rate is higher than that of the Louisiana bar, which results in hundreds of well-qualified would-be entrepreneurs being denied the ability to work in their chosen profession.No one can honestly believe that Louisiana’s flower cartel is necessary to protect consumers from renegade flower sellers. Rather, it is a classic case of protecting favored groups at the expense of consumers and entry-level entrepreneurs. 2. Mercedes Clemens was threatened with thousands of dollars in fines and criminal prosecution unless she stopped . . . massaging horses. In Maryland two powerful groups decided to monopolize the growing field of animal massage by requiring all practitioners to spend four years in veterinary school -- where massage is not even taught.

Suggesting that only people with veterinary degrees are capable of massaging animals is like suggesting that only people with medical degrees are capable of massaging humans. Preventing Clemens -- who is a licensed human-massage therapist and certified in equine massage -- from working in her chosen trade has absolutely nothing to do with consumer or animal safety and everything to do with the financial interests of the veterinary cartel. Read more here.

Milton Friedman, in his book Capitalism and Freedom (Occupational Licensure chapter), wrote "Licensure therefore frequently establishes essentially the medieval guild kind of regulation in which the state assigns power to the members of the profession. In practice, the considerations taken into account in determining who shall get a license often involve matters that, so far as a layman can see, have no relation whatsoever to professional competence."

CD Milestone: 3,000 Posts

CD Post #1 was made on September 20, 2006 (702 days ago), and this is CD Post #3,000. That works out to 4.3 CD posts per day, on average. Figure about one hour per post on average to find something interesting, create and write a post, often with graphs, charts, or tables, which requires finding and downloading data, etc., and that's 3,000 hours of bloggin'!

Thursday, August 21, 2008

M1, M2, Real GDP and CPI Growth: 1970s vs. Now

The chart above shows a comparison of the percentage growth in M1, M2, Real GDP and CPI during two ten-year periods: July 1972 to July 1982, and the most recent 10-year period from July 1998 to July 2008 for M1, M2 and CPI; and 1972:QII to 1982:QII and 1998:QI to 2008:QII for real GDP.

What the data show is that:

1. The percentage growth in M1 was about 3X greater in the 1972-82 period than the 1998-2008 period.

2. The percentage growth in M2 was almost twice as high in the earlier 10-year period.

3. Real GDP growth was roughly the same during both 10-year periods, but slighly higher in the most recent 10-year period.

4. The percentage increase in prices during the 1972-1982 period (132.7%) was almost 4X greater than the increase during the last ten-years (34.8%).

Despite the burst of monetary expansion in 2001 when M2 grew slightly above 10% for three months (calculated from the same month in the previous year) in response to the recession, that monetary expansion 7 years ago wasn't anything like the monetary expansion that took place between 1975 and 1982, when M2 growth exceeded 10% in 45 different months, and exceeded 8% in 115 months between the early 1970s and 1983.

Bottom Line: We're not anywhere close to the monetary expansion and subsequent inflationary environment of the 1970s, and since it's been 7 years since the very moderate monetary expansion of 2001, we won't get there anytime soon.

The New CPI is Better, More Precise Than Old CPI

In a comment Thomas Blair said: "The way CPI is calculated has changed, which makes comparisons between eras or even years irrelevant."

An anonymous commenter writes "Your reasoning is so specious. Firstly you have to recognize that inflation (CPI) is measured differently from the 70s so you're comparing apples to oranges."

The BLS provides CPI data here going back to 1978 using the new CPI-U-RS, which allows for a comparison of inflation calculated in the late 1970s using the old CPI (CPI-U) to inflation calculated using the new CPI (CPI-U-RS), see top chart above for a comparison of the two different CPIs between 1977 and 1998 and bottom chart for a comparison of inflation rates from December 1978 to December 2007 (blue line is inflation using the old CPI and red line is inflation using the new CPI).

Yes, it is true that the old CPI overstated inflation (see top chart above) and it is true that inflation was overstated in some years using the old CPI (see 1979, 1980 and 1981 in bottom chart, when the blue line is above the red line), but then actually understated inflation in the 1983-1984 period (blue line is below red line), and was about the same using either method for most of 1982 and in 1985-1986.

Bottom Line: The old CPI slightly overstated inflation, and revisions were made to correct for the slight upward bias and make the new CPI a more accurate measure of inflation. Some reports seem to suggest that the new CPI creates a downward bias for the way inflation is now reported, and that it would be higher today if it was calculated using the old, upwardly biased method. I think it's better to think of today's CPI and inflation rates as being better, more precise and more accurate measures than those in the past, and any adjustments should be made to previous years' inflation, not today's rates.

Further, I don't think the differences in the old CPI-U and the new CPI-U-RS are meaningful in any way that contributes to the discussion about comparing today's inflation to the 1970s inflation. It's far from a specious, irrelevant, apple to orange comparison, it's much more like comparing one variety of apples to a newer, better variety of apple. Inflation in the late 1970s was at double-digit level by either CPI, and inflation today, measured more accurately than ever before, is nowwhere near double-digits.